Bulge Bracket Firms Take Lions Share of U.S. Equities Commissions

Bulge bracket brokers continue to dominate the U.S. equities commissions paid out by institutions for trading and research, and they appear to be trouncing the competition.

Despite efforts by agency brokers to win a bigger slice of the pie in the post-credit crisis environment, the results of Greenwich Associates 2011 U.S. Equities study reveals that bulge bracket firms have retained their share of U.S. equities research and trading commission spend from 2010 to 2011.

According to Greenwich’s study, bulge bracket brokers held onto their take of the institutional research commission spend at 64 percent of total business. Not only that, big brokers increased their share of institutional trading commissions to 68 percent last year, from 65 percent in 2009-2010.

Here is the breakdown of the rankings: J.P. Morgan is the most widely used provider of U.S. equities research, capturing more than 11.5 percent of the internal voting process by institutions which determines the allocation of equities research commission payments. Three brokers tied for first place – Credit Suisse, Morgan Stanley and Bank of America Merrill Lynch — in market share in institutional U.S. equities trading.

In domestic equities trading, institutions singled out four firms for superior quality: Barclays Capital, Credit Suisse, Goldman Sachs, and J.P. Morgan. In U.S. Equity Research &Analyst Quality, institutions cite Sanford C. Bernstein, J.P. Morgan and Morgan Stanley as tops, stated Greenwich Associates.

The results are eye opening since for the past several years bugle bracket brokers have been losing research commission dollars to mid-sized and regional brokers, boutique broker-dealers and independent research providers, according to Greenwich. In fact, many bulge bracket firms established units to sell third-party independent research so that their electronic trading units could continue to capture the trading commissions. Through the use of commission sharing agreements (CSAs) institutions can trade with the bulge bracket's algos, and still allocate commissions to pay for third-party research elsewhere.

However, bulge bracket firms provide certain services that appeal to the buy side — namely, they facilitate meetings with corporate management teams, which the buy side deems to be an essential service.

Reading between the lines, it looks like institutions are dealing with fewer brokers and they are doling out the commissions carefully. “When the supply of commission dollars is tight, as it has been the case over the past 12 months, institutions make sure that providers of essential services get paid first, and other providers tend to get squeezed,” as Greenwich Associates’ consultant John Colon.

However, the surprise decline in U.S. institutional trading activity in equities has been vexing for the bulge bracket, since they made substantial investments in research and trading platforms, only to have 2010 trading revenues fell short of their expectations. So firms have built more capacity in their trading technology and retooled their algorithms to handle volatility as experienced during the Flash Crash of May 6, 210. Nevertheless, the technology investments appear to be paying off for the bulge bracket, since they have successfully defended their turf. On the other hand, agency brokers won’t take these results lying down.

The likes of Instinet, ConvergEx, Liquidnet and legions of others are marketing themselves as conflict free broker-dealers. Several have entered the corporate access meetings business. It will be interesting to see what shakes out next year if and when the equity trading volumes return.